A DIFFERENT CLASS OF ASSET:
Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class.
In building an investment portfolio, investors should avoid unnecessary risk through wise diversification. Diversification is the allocation of investable funds to a variety of investments. By diversifying, investors can reduce the risk that they would otherwise bear. Also, the risk reduction benefits of diversification can be achieved without reducing the overall return on your portfolio.
The Power of Diversification
The key to diversification is finding investments that are not closely correlated with one another. Other things being equal, the less the correlation between two investments, the better suited they are for effective diversification. This gives rise to a problem for most investors because most stocks are relatively closely correlated with one another and most bonds are relatively closely correlated with each other. In addition, there is also a close correlation between stocks and bonds. Investors need to find investments that are not closely correlated to stocks and bonds and include them as additional elements in their portfolios.
Diversification Reduces Risk
Many investors combine tangible assets with their stock and bond portfolios to reduce risk. This is due to the fact that tangible assets have historically had a very low, even negative, correlation with stocks and bonds. This means that they are useful to hold in conjunction with paper investments in order to reduce total risk. Not only is the risk reduced due to negative correlation between tangible and paper assets, but tangible assets have produced exceptional investment returns on their own. Every sign today points to increasing importance for diversification; that also means increasing importance for tangible assets.
I. GOLD – STORE OF VALUE
One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998 report for the World Gold Council,
“…although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth. It has also proved to be a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
Today is the scenario that the World Gold Council report was referring to in 1998.
II. GOLD - PORTFOLIO DIVERSIFIER
The most effective way to diversify your portfolio and protect the wealth created in the stock and financial markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks.
Diversification: The Key to Gold Investing
One of the most important aspects of investing is the control of risk in your portfolio, relative to the expected return. Tangible assets are an extremely useful tool for investors in that regard.
Portfolios that contain gold are generally more robust and better able to cope with market uncertainties than those that don’t.
Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset. It is an ‘effective diversifier’ because its performance tends to move independently of other investments and key economic indicators.
Recent independent studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.
There are six primary reasons why investors own gold:
1. As a hedge against inflation.
2. As a hedge against a declining dollar.
3. As a safe haven in times of geopolitical and financial market instability.
4. As a commodity, based on gold’s supply and demand fundamentals.
5. As a store of value.
6. As a portfolio diversifier.
III. HEDGE AGAINST INFLATION
Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.
Today, a number of factors are conspiring to create the perfect inflationary storm: extremely stimulative monetary policy, a major tax cut, a long term decline in the dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation. Almost across the board, commodity prices up despite the short-term absence of a weakening dollar which is often viewed as the principal reason for stronger commodity prices.
Oil, Inflation and Gold
Although the prices of gold and oil don’t exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been two major upward moves in the price of gold since it was freed to float in 1968. The first occurred between 1972 and 1974 when oil prices climbed 325%, from US$2.44 to US$10.36. During the same period, gold prices rose 268% (on a quarterly average basis) from US$47.45 to US$174.76. The second major price move occurred between 1978 and 1980, when oil prices increased 105%, from US$12.70 to US$26.00. Over the same period, quarterly average gold prices rose 254% from US$178.33 to US$631.40.
IV. GOLD - HEDGE AGAINST A DECLINING DOLLAR
Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world’s reserve currency - the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world’s central banks. However, now that it has been stripped of its gold backing international banks and Countries are reviewing there currency reserve options
V. GOLD AS A SAFE HAVEN
Despite the fact that the United States is the world’s only remaining superpower, there are a myriad of problems festering around the world, any one of which could erupt with little warning. Gold has often been called the “crisis commodity” because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilise the world economyAs banking crises occur, the public begins to distrust paper assets and turns to gold for a safe haven.
When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
VI. GOLD - SUPPLY AND DEMAND
First, demand is out pacing supply across the board. Gold production is declining; Copper production is declining; the production of lead and other metals is declining. It is very difficult to open new mines when the whole process takes about seven years on average, making it hard to address the supply issue quickly. Gold output in South Africa, the world’s largest gold producer, fell to its lowest level since 1931 this past year as the rand’s gains prompted Harmony Gold Mining Co. and rivals to close mines despite 16 year highs in the gold price.
Growing Demand - China, India and Gold India is the largest gold-consuming nation in the world. China, on the other hand, has the fastest-growing economy in modern history. Both India and China are in the process of liberalizing laws relating to the import and sale of gold in ways that will facilitate gold purchases on a mammoth scale.
China is teaching the West something new. Its economy, growing at 9 percent per year, is expected to become the second largest in the world by 2020, behind only the United States. Last year Americans spent $162 billion more on Chinese goods than the Chinese spent on U.S. products. That gap has been growing by more than 25 percent per year. China’s consumer class, meanwhile, is spending on everything from bagels to Bentleys – and will soon outnumber the entire U.S. population. China’s explosive growth “could be the dominant event of this century,” says Stapleton Roy, former U.S. Ambassador to China. “Never before has a country risen as fast as China is doing.”
Tuesday, November 23, 2010
Fiat System in History
John law, a Scottish gambler and amateur economist, was able to convince to the regent that the main reason for the economic to slow down is due to gold and silver were too scarce and inelastic to serve as money.
He proposed by switching to paper, trade would be faster as more currency is created. He set up a bank that took deposits in coin, but issued loans and withdrawals in paper.
His newly created Banque Royale (Royal Bank) issued 2.7 billion livres in banknotes in the space of two years. His newly created Mississippi Company achieved a market capitalization of 5 billion livres over the same period. This resulted in a massive stock market bubble. Following a parabolic blow off, the bubble collapsed, the bank failed and Law fled the country, leaving destitution in his wake. (Antoine Murphy, John Law (Oxford, 1997), passim.)
However, people wanted gold and silver when they took profits. Law capped redemption in gold and silver to avoid depleting his reserves. This removed France's paper currency from the gold and silver standard and hence put it on the Mississippi Company share price standard. The amount of paper currency afloat was now many times the actual reserves of gold and silver and hyperinflation set in.
In 1720, the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was successful until the French government was forced to admit that the number of paper notes being issued by the Banque Royale were not equal to the amount of metal coinage it held. (The French Period" (of New Orleans area), 2009)
2nd fiat system (United State)
The second episode was the case of the Continental Congress. This is the most sympathetic of the four. Meeting in May 1775 following the outbreak of hostilities at Lexington and Concord, Congress had a war to finance and no clear way to do so.
It could not levy taxes because its authority was unclear. Both the British Crown and the individual states claimed the power to tax, and anyway, a brand new tax would not have gone down well in the context of a rebellion that was largely about taxes.
A loan was also out of the question, since a lender would have been crazy to take the risk of funding a ragtag band of colonial rebels at the outset of their rebellion. So Congress did what it had to do, and printed up the money.
Lots of it.
Over the next five years, until they stopped the presses in 1780, Congress issued about $241 million face amount of irredeemable, non-convertible paper bills known as “Continentals.”11 The bills served their purpose, keeping the armies in the field, but how they functioned in practice is described in the following passage (William G. Anderson, The Price of Liberty (University Press of Virginia, 1983), p. 3.):
A barber wallpapered his shop with Continentals. An old soldier, wounded in the leg, used a bundle of his pay as a bandage, and coined the word “shinplaster,” which was later used to describe any sort of money that could not be redeemed. A ship’s crew discharged in Boston, and paid off in now worthless currency, found a way of making suits out of the paper bills and paraded through the streets. “For two or three years we constantly saw and were informed of creditors running away from their debtors, and the debtors pursuing them in triumph, and paying them without mercy,” wrote [a contemporary observer]. 3rd fiat system (France)
The third episode was the fiat money of Revolutionary France. This was the most chilling of the four, intertwined as it was with the Reign of Terror. In 1789, France was broke once again, with a heavy debt and a serious deficit. With the memory of John Law still fresh, the Jacobins set about their experiment with great caution and solemnity. They promised themselves they would limit the emission of paper, called assignats, to 400 million, come what may. They over-collateralized the paper with the extensive and valuable lands of the church that had been seized in the name of the people. They put bells and whistles on the paper to distinguish it from the plain paper used in Law’s Bubble, and to signify that it was tightly controlled. They persuaded themselves that the evils of the earlier debacle stemmed from the fact that Law’s paper was the issue of a corrupt monarchy operating in secret. This time would be different; after all, it was now the virtuous people operating in the open. Wrong.
By the morning of February 18, 1796, when all the machinery, plates and paper for printing the hated paper money were finally broken and burned in the Place Vendome, a total of 45 billion had been issued.( Andrew Dickson White, Fiat Money Inflation in France (Foundation for Economic Freedom, 1959), p. 93) Here we see one of the revolutionary kingpins, Marat, as depicted shortly after his assassination by Charlotte Corday.
Note the assignat on the table by his bathtub.
4th fiat system (Germany)
The fourth episode was the German inflation following the defeat of Imperial Germany in World War I. This is probably the most famous of the four. Everyone’s heard stories of wheelbarrows filled with paper money needed to buy a loaf of bread, wage payments made twice daily to keep up with the inflation, etc. It started with Germany’s defeat in the war. Germany was an economic basketcase. It had counted on winning, and paying for the war with booty. It had bled its population white and stuffed its central bank with government paper. To make matters worse, the victors imposed heavy reparations through the infamous Treaty of Versailles.
After handing over its merchant marine, its rolling stock, its flocks and herds, as well as a large portion of its gold reserves, Germany turned to printing new marks and selling them in the foreign exchange market for whatever they would bring. (Benjamin M. Anderson, Economics and the Public Welfare (LibertyPress, 2nd ed., 1979), p. 106)
Before the War, the mark had an exchange value of about 24 cents. When postwar trade started up in the summer of 1919, the mark fetched 8 cents. ( Ibid., p. 107) Four and a half years later the currency was replaced by a new rentenmark, which had a value of about 24 cents. The conversion rate was 1 trillion old marks for each rentenmark.
Fiats Past and Present
Unit
Context
Duration
Severity
Banque Royale Notes
Regency of Louis XV
1716-1720
one livre to zero
Continental Bills
American Revolution
1775-1780
1/specie dollar to 40/specie dollar
Assignats
French Revolution
1790-1797
1/gold franc to 600/gold franc
Reichsmarks
Weimar Germany
1919-1924
.08/US$ to 4.2 trillion/US$
Federal Reserve Notes
Cold War
1971-20??
to be determined
Now, despite their obvious differences, these episodes had several important features in common. To begin with, it’s worth noting that in each case the fateful errors were made by talented and well-educated people. They were their countries’ best and brightest financial minds. This includes John Law, by the way, who’s gotten very bad, and I think, unfair, press ever since. These men did not take the road to ruin frivolously, but rather as a measured response to a set of exigent circumstances. The point is that governments are simply incapable of managing a money supply. The pressures and temptations always prove too great.
He proposed by switching to paper, trade would be faster as more currency is created. He set up a bank that took deposits in coin, but issued loans and withdrawals in paper.
His newly created Banque Royale (Royal Bank) issued 2.7 billion livres in banknotes in the space of two years. His newly created Mississippi Company achieved a market capitalization of 5 billion livres over the same period. This resulted in a massive stock market bubble. Following a parabolic blow off, the bubble collapsed, the bank failed and Law fled the country, leaving destitution in his wake. (Antoine Murphy, John Law (Oxford, 1997), passim.)
However, people wanted gold and silver when they took profits. Law capped redemption in gold and silver to avoid depleting his reserves. This removed France's paper currency from the gold and silver standard and hence put it on the Mississippi Company share price standard. The amount of paper currency afloat was now many times the actual reserves of gold and silver and hyperinflation set in.
In 1720, the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was successful until the French government was forced to admit that the number of paper notes being issued by the Banque Royale were not equal to the amount of metal coinage it held. (The French Period" (of New Orleans area), 2009)
2nd fiat system (United State)
The second episode was the case of the Continental Congress. This is the most sympathetic of the four. Meeting in May 1775 following the outbreak of hostilities at Lexington and Concord, Congress had a war to finance and no clear way to do so.
It could not levy taxes because its authority was unclear. Both the British Crown and the individual states claimed the power to tax, and anyway, a brand new tax would not have gone down well in the context of a rebellion that was largely about taxes.
A loan was also out of the question, since a lender would have been crazy to take the risk of funding a ragtag band of colonial rebels at the outset of their rebellion. So Congress did what it had to do, and printed up the money.
Lots of it.
Over the next five years, until they stopped the presses in 1780, Congress issued about $241 million face amount of irredeemable, non-convertible paper bills known as “Continentals.”11 The bills served their purpose, keeping the armies in the field, but how they functioned in practice is described in the following passage (William G. Anderson, The Price of Liberty (University Press of Virginia, 1983), p. 3.):
A barber wallpapered his shop with Continentals. An old soldier, wounded in the leg, used a bundle of his pay as a bandage, and coined the word “shinplaster,” which was later used to describe any sort of money that could not be redeemed. A ship’s crew discharged in Boston, and paid off in now worthless currency, found a way of making suits out of the paper bills and paraded through the streets. “For two or three years we constantly saw and were informed of creditors running away from their debtors, and the debtors pursuing them in triumph, and paying them without mercy,” wrote [a contemporary observer]. 3rd fiat system (France)
The third episode was the fiat money of Revolutionary France. This was the most chilling of the four, intertwined as it was with the Reign of Terror. In 1789, France was broke once again, with a heavy debt and a serious deficit. With the memory of John Law still fresh, the Jacobins set about their experiment with great caution and solemnity. They promised themselves they would limit the emission of paper, called assignats, to 400 million, come what may. They over-collateralized the paper with the extensive and valuable lands of the church that had been seized in the name of the people. They put bells and whistles on the paper to distinguish it from the plain paper used in Law’s Bubble, and to signify that it was tightly controlled. They persuaded themselves that the evils of the earlier debacle stemmed from the fact that Law’s paper was the issue of a corrupt monarchy operating in secret. This time would be different; after all, it was now the virtuous people operating in the open. Wrong.
By the morning of February 18, 1796, when all the machinery, plates and paper for printing the hated paper money were finally broken and burned in the Place Vendome, a total of 45 billion had been issued.( Andrew Dickson White, Fiat Money Inflation in France (Foundation for Economic Freedom, 1959), p. 93) Here we see one of the revolutionary kingpins, Marat, as depicted shortly after his assassination by Charlotte Corday.
Note the assignat on the table by his bathtub.
4th fiat system (Germany)
The fourth episode was the German inflation following the defeat of Imperial Germany in World War I. This is probably the most famous of the four. Everyone’s heard stories of wheelbarrows filled with paper money needed to buy a loaf of bread, wage payments made twice daily to keep up with the inflation, etc. It started with Germany’s defeat in the war. Germany was an economic basketcase. It had counted on winning, and paying for the war with booty. It had bled its population white and stuffed its central bank with government paper. To make matters worse, the victors imposed heavy reparations through the infamous Treaty of Versailles.
After handing over its merchant marine, its rolling stock, its flocks and herds, as well as a large portion of its gold reserves, Germany turned to printing new marks and selling them in the foreign exchange market for whatever they would bring. (Benjamin M. Anderson, Economics and the Public Welfare (LibertyPress, 2nd ed., 1979), p. 106)
Before the War, the mark had an exchange value of about 24 cents. When postwar trade started up in the summer of 1919, the mark fetched 8 cents. ( Ibid., p. 107) Four and a half years later the currency was replaced by a new rentenmark, which had a value of about 24 cents. The conversion rate was 1 trillion old marks for each rentenmark.
Fiats Past and Present
Unit
Context
Duration
Severity
Banque Royale Notes
Regency of Louis XV
1716-1720
one livre to zero
Continental Bills
American Revolution
1775-1780
1/specie dollar to 40/specie dollar
Assignats
French Revolution
1790-1797
1/gold franc to 600/gold franc
Reichsmarks
Weimar Germany
1919-1924
.08/US$ to 4.2 trillion/US$
Federal Reserve Notes
Cold War
1971-20??
to be determined
Now, despite their obvious differences, these episodes had several important features in common. To begin with, it’s worth noting that in each case the fateful errors were made by talented and well-educated people. They were their countries’ best and brightest financial minds. This includes John Law, by the way, who’s gotten very bad, and I think, unfair, press ever since. These men did not take the road to ruin frivolously, but rather as a measured response to a set of exigent circumstances. The point is that governments are simply incapable of managing a money supply. The pressures and temptations always prove too great.
Gold Historical Timeline
Significant Events and the Price of Gold in the Last 50 Years
1961: The London Gold Pool was established; U.S. central banks and seven nations agreed to buy and sell gold to support the $35 per troy ounce price established on January 31, 1934
1968: The London Gold Pool was discontinued; the two-tier gold price was established – one tier was for official monetary transactions, the other for open-market transactions
1968: Zurich Gold Pool, a buying cartel created by key Swiss banks, is established, giving Switzerland its dominant financial position in the market
1969: Gold Exchange of Singapore opens; serves as a very important link between Far East countries and London
1971: U.S. President suspends convertibility of dollar into gold; dollar devalued by 7.9%
1973: Official U.S. gold price increased to $42.22 per/oz.; US dollar devalued; two-tier gold price terminated; Organization of Petroleum Exporting Countries (OPEC) oil embargo begins
1974: Hong Kong gold market booms; government restrictions on imports lifted
1975: U.S. citizens allowed to hold gold bullion and gold coins for the first time in 40 years
1978: Middle Eastern investors increase gold purchases with oil profits
1980: Gold price peaks at an historic daily high on January 21
1987: Birth of the London Bullion Market Association (LBMA) establishing criteria for refiners and guaranteeing quality of gold bullion bars throughout the world
1989-1991: Conflict in Persian Gulf; collapse of Soviet Union marking end of Cold War; weak economic growth worldwide
1997-1998: Central Banks of several countries sell large quantities of gold holdings to meet currency criteria for Euro; East Asia suffers economic crisis
2000: China deregulates gold markets; Chinese citizens allowed to buy gold bullion after 50 years of closed markets
2000: USA technology sector and “Dot-com” stock market crash
2001: USA “9-11” terrorist attacks in New York City; gold begins historic rise as investors seek “safe haven” in physical gold
2002: China launches gold market, opening the Shanghai Gold Exchange
2003: Introduction of the Euro devalues the U.S. dollar on the international market; oil prices hit $78/barrel; gold surpasses $350/oz.
2006: Barrick Gold and Newmont Mining predict gold reserves will be depleted in 10 years at current production rates; gold prices surge 20% yearly since 2001 to over $650/oz.
2007: Dubai and Saudi oil producers announce major gold bullion purchases to be stored in Dubai; China announces plan to increase gold bullion purchases with excess cash reserves; Vietnam opens Ho Chi Minh Trading Center, Vietnam’s first gold exchange; Gold demand outpaces supply
2007: China invites five world banks, including HSBC, Societe Generale, and Standard Chartered to join the Shanghai Gold Exchange, opening the exchange to global trading
2008: Gold price breaks through $1,000 barrier in early 2008; China opens Shanghai Futures Exchange placing additional demand on gold supply; oil prices surpass $100/barrel milestone; gasoline hits all-time high in U.S.; U.S. crippled by financial crisis; U.S. Dollar hits new lows
1961: The London Gold Pool was established; U.S. central banks and seven nations agreed to buy and sell gold to support the $35 per troy ounce price established on January 31, 1934
1968: The London Gold Pool was discontinued; the two-tier gold price was established – one tier was for official monetary transactions, the other for open-market transactions
1968: Zurich Gold Pool, a buying cartel created by key Swiss banks, is established, giving Switzerland its dominant financial position in the market
1969: Gold Exchange of Singapore opens; serves as a very important link between Far East countries and London
1971: U.S. President suspends convertibility of dollar into gold; dollar devalued by 7.9%
1973: Official U.S. gold price increased to $42.22 per/oz.; US dollar devalued; two-tier gold price terminated; Organization of Petroleum Exporting Countries (OPEC) oil embargo begins
1974: Hong Kong gold market booms; government restrictions on imports lifted
1975: U.S. citizens allowed to hold gold bullion and gold coins for the first time in 40 years
1978: Middle Eastern investors increase gold purchases with oil profits
1980: Gold price peaks at an historic daily high on January 21
1987: Birth of the London Bullion Market Association (LBMA) establishing criteria for refiners and guaranteeing quality of gold bullion bars throughout the world
1989-1991: Conflict in Persian Gulf; collapse of Soviet Union marking end of Cold War; weak economic growth worldwide
1997-1998: Central Banks of several countries sell large quantities of gold holdings to meet currency criteria for Euro; East Asia suffers economic crisis
2000: China deregulates gold markets; Chinese citizens allowed to buy gold bullion after 50 years of closed markets
2000: USA technology sector and “Dot-com” stock market crash
2001: USA “9-11” terrorist attacks in New York City; gold begins historic rise as investors seek “safe haven” in physical gold
2002: China launches gold market, opening the Shanghai Gold Exchange
2003: Introduction of the Euro devalues the U.S. dollar on the international market; oil prices hit $78/barrel; gold surpasses $350/oz.
2006: Barrick Gold and Newmont Mining predict gold reserves will be depleted in 10 years at current production rates; gold prices surge 20% yearly since 2001 to over $650/oz.
2007: Dubai and Saudi oil producers announce major gold bullion purchases to be stored in Dubai; China announces plan to increase gold bullion purchases with excess cash reserves; Vietnam opens Ho Chi Minh Trading Center, Vietnam’s first gold exchange; Gold demand outpaces supply
2007: China invites five world banks, including HSBC, Societe Generale, and Standard Chartered to join the Shanghai Gold Exchange, opening the exchange to global trading
2008: Gold price breaks through $1,000 barrier in early 2008; China opens Shanghai Futures Exchange placing additional demand on gold supply; oil prices surpass $100/barrel milestone; gasoline hits all-time high in U.S.; U.S. crippled by financial crisis; U.S. Dollar hits new lows
Gold is Money
Global Currency
All of today currencies are fiat currencies. Fiat currency is defines as not represent anything tangible but are only worth something due to government decree (namely legal tender laws). In the book "Principles of Economics" written by N. Gregory mention that Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money."
"We have gold because we cannot trust Governments."
- President Herbert Hoover
On the other hand, gold are the currency which not created and controlled by governments. Gold was once the main currency in most of Europe, Asia and Americans for the past few thousand years which up to 1971. Gold which evolved independently as money in the word's main civilization due to the following reasons:
1. Rare
The amount of mined gold has increased only slowly, rarely more than 2% per year.
2. Durability
Gold won't rot, break, crumble, decay, corrode or tarnish. Gold is unaffected by air, water, and even most acids.
3. Compact
If all the gold ever mined were made into a single cube. Its edge would be 20 meters. Not quite enough to cover a single tennis court. (http:goldnews.bullionvault.com/node/259/print)
4. Divisibility
Easily reshape it, flatten it, and divide it into tiny pieces.
"The modern mind dislikes gold because it blurts out unpleasant truths."
- Joseph Schumpeter (1883 - 1950)
From 1934 to 1971, government currencies were backed by gold. This defined which at any time, you able to exchange a unit of any of the world's main government currencies for a prescribed amount of gold. For an example, you could exchange 35 US dollar for one ounce of gold. But in 1971, President Richard Nixon abandoned the Bretton Woods Agreement, devalued the dollar, raised the fixed price of gold fictitiously to $37.50, and slammed shut the gold window to stop an international run on the U.S. gold reserve. This is when the fiat currency started.
Examples of other fiat currencies include:
1. Chinese bark currency (notes printed on tree bark, as recorded by Marco Polo), 1260 - 1360. One of the earliest fiat currencies, ended in hyperinflation.
2. Banque Royale Notes in France, the ‘Mississippi system' (designed by John Law). Issued in 1716. Collapsed worth nothing by 1720.
3. Continental bills, printed by the US Congress during the American Revolution. Began issue in 1775, shrank to 1/40 of their original value by 1780. Hence the saying ‘not worth a Continental'.
4. Assignats in France during the French Revolution. Issued 1790-1796, collapsed to 1/600 of their original value by 1797.
5. Marks in Weimar Germany, after WWI. Issued from 1919 to 1924, collapsed to three trillionths of their original value. This was the currency that was carried in wheelbarrows towards the end.
Hence from an historical perspective, the only question is how quickly the US dollar loses value, not whether it will continue to lose value. Until the 1971, a US dollar was worth 1/35 of an ounce of gold. But right till today the gold is about 1/1000 of an ounce of gold (http://www.gold-eagle.com/editorials_04/evans061304.html)
Another example, in Vietnam, gold plays an important role in the purchase of a home. From the moment a buyer and seller agree on a price to the day the paperwork and sale are completed takes a month or longer. During this time, the value of the Vietnamese currency may have fallen sharply, as the current rate of currency depreciation in that country is very rapid. Accordingly, the buyer will arrange financing with a bank not in terms of the Vietnamese dong, but in gold, which holds its value in terms of purchasing power. This arrangement means the buyer will still have enough to pay the agreed price when the sale is consummated (responsiblegold.org).
Sources: (http://www.galmarley.com/framesets/fs_fundamental_properties_faqs.htm)
All of today currencies are fiat currencies. Fiat currency is defines as not represent anything tangible but are only worth something due to government decree (namely legal tender laws). In the book "Principles of Economics" written by N. Gregory mention that Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money."
"We have gold because we cannot trust Governments."
- President Herbert Hoover
On the other hand, gold are the currency which not created and controlled by governments. Gold was once the main currency in most of Europe, Asia and Americans for the past few thousand years which up to 1971. Gold which evolved independently as money in the word's main civilization due to the following reasons:
1. Rare
The amount of mined gold has increased only slowly, rarely more than 2% per year.
2. Durability
Gold won't rot, break, crumble, decay, corrode or tarnish. Gold is unaffected by air, water, and even most acids.
3. Compact
If all the gold ever mined were made into a single cube. Its edge would be 20 meters. Not quite enough to cover a single tennis court. (http:goldnews.bullionvault.com/node/259/print)
4. Divisibility
Easily reshape it, flatten it, and divide it into tiny pieces.
"The modern mind dislikes gold because it blurts out unpleasant truths."
- Joseph Schumpeter (1883 - 1950)
From 1934 to 1971, government currencies were backed by gold. This defined which at any time, you able to exchange a unit of any of the world's main government currencies for a prescribed amount of gold. For an example, you could exchange 35 US dollar for one ounce of gold. But in 1971, President Richard Nixon abandoned the Bretton Woods Agreement, devalued the dollar, raised the fixed price of gold fictitiously to $37.50, and slammed shut the gold window to stop an international run on the U.S. gold reserve. This is when the fiat currency started.
Examples of other fiat currencies include:
1. Chinese bark currency (notes printed on tree bark, as recorded by Marco Polo), 1260 - 1360. One of the earliest fiat currencies, ended in hyperinflation.
2. Banque Royale Notes in France, the ‘Mississippi system' (designed by John Law). Issued in 1716. Collapsed worth nothing by 1720.
3. Continental bills, printed by the US Congress during the American Revolution. Began issue in 1775, shrank to 1/40 of their original value by 1780. Hence the saying ‘not worth a Continental'.
4. Assignats in France during the French Revolution. Issued 1790-1796, collapsed to 1/600 of their original value by 1797.
5. Marks in Weimar Germany, after WWI. Issued from 1919 to 1924, collapsed to three trillionths of their original value. This was the currency that was carried in wheelbarrows towards the end.
Hence from an historical perspective, the only question is how quickly the US dollar loses value, not whether it will continue to lose value. Until the 1971, a US dollar was worth 1/35 of an ounce of gold. But right till today the gold is about 1/1000 of an ounce of gold (http://www.gold-eagle.com/editorials_04/evans061304.html)
Another example, in Vietnam, gold plays an important role in the purchase of a home. From the moment a buyer and seller agree on a price to the day the paperwork and sale are completed takes a month or longer. During this time, the value of the Vietnamese currency may have fallen sharply, as the current rate of currency depreciation in that country is very rapid. Accordingly, the buyer will arrange financing with a bank not in terms of the Vietnamese dong, but in gold, which holds its value in terms of purchasing power. This arrangement means the buyer will still have enough to pay the agreed price when the sale is consummated (responsiblegold.org).
Sources: (http://www.galmarley.com/framesets/fs_fundamental_properties_faqs.htm)
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